Three-fund constant proportion portfolio insurance strategy

Ze Chen, Bingzheng Chen, Yi Hu, Hai Zhang

Research output: Contribution to conferencePaper

Abstract

Specific purpose guarantee funds (SPGFs) such as pension guarantee funds are becoming much popular among loss averse investors with common peculiar investment purpose, but receive few academic attention regarding to its investment strategy, hedging technique and performance. In this paper we propose a more practical constant proportion portfolio insurance (CPPI) strategy, three-fund CPPI (hereafter 3F-CPPI) strategy, which optimally allocates its assets in three funds: a risk-free fund, a stock-index fund and a purpose-related stock fund, to maximize the loss averse investor’s utility and to control the downside risk as well. Closed-form solutions of the optimal allocations of 3F-CPPI and its outcome distribution have been derived first under the continuous time case, followed by an extensive Monte Carlo simulation under the discrete time case to compare 3F-CPPI with other benchmark strategies such as CPPI. Our simulation results show that the proposed 3F-CPPI dominates other benchmark strategies in almost all the aspects such as the mean return, downside risk control and loss averse utility.

Conference

ConferenceEuropean Financial Management Association 2019 Annual Meeting
CountryPortugal
CityPonta Delgada
Period26/06/1929/06/19
Internet address

Fingerprint

Proportion
Portfolio insurance
Guarantee
Investors
Downside risk
Benchmark
Optimal allocation
Discrete-time
Pensions
Risk control
Continuous time
Simulation
Assets
Closed-form solution
Investment strategy
Monte Carlo simulation
Hedging
Index funds
Stock index

Keywords

  • portfolio insurance strategies
  • specific purpose guarantee funds
  • CPPI
  • 3F-CPPI

Cite this

Chen, Z., Chen, B., Hu, Y., & Zhang, H. (2019). Three-fund constant proportion portfolio insurance strategy. Paper presented at European Financial Management Association 2019 Annual Meeting, Ponta Delgada, Portugal.
Chen, Ze ; Chen, Bingzheng ; Hu, Yi ; Zhang, Hai. / Three-fund constant proportion portfolio insurance strategy. Paper presented at European Financial Management Association 2019 Annual Meeting, Ponta Delgada, Portugal.31 p.
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Chen, Z, Chen, B, Hu, Y & Zhang, H 2019, 'Three-fund constant proportion portfolio insurance strategy' Paper presented at European Financial Management Association 2019 Annual Meeting, Ponta Delgada, Portugal, 26/06/19 - 29/06/19, .

Three-fund constant proportion portfolio insurance strategy. / Chen, Ze; Chen, Bingzheng; Hu, Yi; Zhang, Hai.

2019. Paper presented at European Financial Management Association 2019 Annual Meeting, Ponta Delgada, Portugal.

Research output: Contribution to conferencePaper

TY - CONF

T1 - Three-fund constant proportion portfolio insurance strategy

AU - Chen, Ze

AU - Chen, Bingzheng

AU - Hu, Yi

AU - Zhang, Hai

PY - 2019/6/26

Y1 - 2019/6/26

N2 - Specific purpose guarantee funds (SPGFs) such as pension guarantee funds are becoming much popular among loss averse investors with common peculiar investment purpose, but receive few academic attention regarding to its investment strategy, hedging technique and performance. In this paper we propose a more practical constant proportion portfolio insurance (CPPI) strategy, three-fund CPPI (hereafter 3F-CPPI) strategy, which optimally allocates its assets in three funds: a risk-free fund, a stock-index fund and a purpose-related stock fund, to maximize the loss averse investor’s utility and to control the downside risk as well. Closed-form solutions of the optimal allocations of 3F-CPPI and its outcome distribution have been derived first under the continuous time case, followed by an extensive Monte Carlo simulation under the discrete time case to compare 3F-CPPI with other benchmark strategies such as CPPI. Our simulation results show that the proposed 3F-CPPI dominates other benchmark strategies in almost all the aspects such as the mean return, downside risk control and loss averse utility.

AB - Specific purpose guarantee funds (SPGFs) such as pension guarantee funds are becoming much popular among loss averse investors with common peculiar investment purpose, but receive few academic attention regarding to its investment strategy, hedging technique and performance. In this paper we propose a more practical constant proportion portfolio insurance (CPPI) strategy, three-fund CPPI (hereafter 3F-CPPI) strategy, which optimally allocates its assets in three funds: a risk-free fund, a stock-index fund and a purpose-related stock fund, to maximize the loss averse investor’s utility and to control the downside risk as well. Closed-form solutions of the optimal allocations of 3F-CPPI and its outcome distribution have been derived first under the continuous time case, followed by an extensive Monte Carlo simulation under the discrete time case to compare 3F-CPPI with other benchmark strategies such as CPPI. Our simulation results show that the proposed 3F-CPPI dominates other benchmark strategies in almost all the aspects such as the mean return, downside risk control and loss averse utility.

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KW - specific purpose guarantee funds

KW - CPPI

KW - 3F-CPPI

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M3 - Paper

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Chen Z, Chen B, Hu Y, Zhang H. Three-fund constant proportion portfolio insurance strategy. 2019. Paper presented at European Financial Management Association 2019 Annual Meeting, Ponta Delgada, Portugal.